Major Pennsylvania Cities Teeter on the Brink of Chapter 9 Bankruptcy

August 7, 2012

By: John Clark

More than 20 cities in Pennsylvania are flirting with the very real possibility of filing for bankruptcy, according to a recent report from Fox Business.

State officials told reporters this week that 21 cities, including Pittsburgh, are in a state of financial distress due to sinking tax revenue, rising pension costs, and rapidly growing demand for basic municipal services, sources say.

And these cities are not alone, as municipalities in California, Alabama, Rhode Island, and Nebraska have all sought debt relief in bankruptcy court over the summer months.

The Pennsylvania cities, however, seem to be in even worse financial shape, as evidence by Scranton’s recent decision to reduce city employees’ salaries to minimum wage in order to meet its rapidly shrinking payroll allowances.

Of course, some experts note that Pennsylvania towns may be better off than cities in, say, California, because they can raise as much money as they can through real estate taxes. This is prohibited in California and other states.

Interestingly, because of this nuance in Pennsylvania law, cities in the Keystone State were actually in better financial shape during the home foreclosure crisis because all of the real estate action increased many cities’ revenue streams. Pennsylvania fared better when the housing bubble burst, forcing foreclosures and further reducing cash flow.

But this brief uptick in real estate revenue masked structural financial problems in Pennsylvania, including the recession, reduced tax collections in other realms, and millions of dollars in pension and health care costs for municipal employees.

According to Allentown Mayor Ed Pawlowski, these ailments are afflicting cities "across the country," and he expects to see "a lot of cities fall into bankruptcy." In fact, Pawlowski believes cities will soon start "falling like dominos."

One controversial option for many Pennsylvania cities, according to sources, would be consolidation. This would allow cities to pool their resources to create a more promising financial future.

But, according to Robert Strauss, a professor at Pittsburgh’s Carnegie Mellon University, "nobody has the political courage" to take such a drastic step.